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The challenge of how to responsibly extend small-dollar credit can be met, and it starts with knowing the needs of the borrower.
December 12 -
New York's Benjamin Lawsky and other state regulators have given no indication of differentiating between online lenders that operate well and those that dont. Yet the spectrum of alternative lending operations indicates that just such a distinction is needed.
December 9
Banks should not be using the benefit of low-cost capital made available to them by their status as regulated institutions to fund businesses that extend harmful high-cost lending products. Let hedge funds, venture capitalists, and other nonbank sources provide that capital.
Reinvestment Partners, my nonprofit advocacy group in North Carolina, is releasing a
Some would decry the idea of divestiture on the grounds that
Leaders of consumer-facing companies make a mistake when they ignore any
Significantly, consumers see no gains from the extension of so much corporate debt at these low rates. Some of the retail storefront payday lenders financed by these banks lend those dollars back out to the community at rates of as high as 500%.
This type of behavior is a net loss that outweighs many of the good things that banks do elsewhere in communities.
The relationships between banks and questionable operators do not end with corporate lending. Many high-cost nonbank lenders have individuals on their boards who currently or previously worked for large banks and investment houses.
High-cost consumer finance companies mentioned in our report make it explicitly clear that they need these loans. Consider a statement made recently by
We depend on borrowings under our revolving credit facility to fund loans, capital expenditures, smaller acquisitions, cash dividends and other needs. If consumer banks decide not to lend money to companies in our industry or to us, our ability to borrow at competitive interest rates (or at all), our ability to operate our business and our cash availability would likely be adversely affected.
The shame of it all is that these banks could walk away from this line of business without any material impact to their profitability. The interest that would be foregone from divestiture would make little or no difference to a group of banks that together have trillions in assets on their balance sheets.
But if the banks do not want to divest, their regulator should make them do so.
The Office of the Comptroller of the Currency regulates nine of the ten largest banks lending in this space. The top five Wells Fargo, Bank of America, JPMorgan Chase, Capital One, and Union Bank all operate under the oversight of the OCC. The agencys recent rulemaking on the deposit advance products marketed by several of its banks shows a concern regarding these high-cost products and the impact they make upon consumers of regulated institutions. But the OCC should also recognize that lending by national banks to these companies is a pressing problem. These practices pose a serious risk to the reputations of the banks under its supervision.
Adam Rust is the director of research at Reinvestment Partners, an advocacy group in Durham, N.C., and author of the blog